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Time to Clean the Portfolio

Posted: Sep 11, 2008 13:49 PM by Matthew McCall

Tickers in this Article: ECL, DAR, SCL, CLX, CHD

So far, 2008 has been a difficult year for investors as they come home from Wall Street beaten, battered and dirty on a daily basis. The products you reach for to clean up before dinner or to wash your clothes have been one of the few bright spots in the stock market. That’s right - the cleaning products sector has been a strong performer in a down market.

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Basic Cleaners
It is rare to find a stock that is either at or just off its all-time high, but Church & Dwight (NYSE:CHD) falls into that category. The stock has put together a solid move this year, gaining 16%. Looking back on its history, it has been in an uptrend for decades.

The company is likely best known for its Arm & Hammer baking soda that has a variety of uses. C&D also produces toothpaste, carpet deodorizers, Trojan condoms and more. At current levels, the stock is a bit pricey with a trailing 12-month (TTM) price to earnings (P/E) ratio of 24 and a price/earnings to growth (PEG) of 1.8, according to Yahoo Finance's five-year expectations. (For more on evaluating stocks based on ratios, check out Analyze Investments Quickly With Ratios.)

One of CHD’s direct competitors and a company twice its size is Clorox (NYSE:CLX). Fundamentally, the company has an identical PEG of 1.8, but a TTM P/E ratio of just below 20. Overall, they are very similar based on the numbers (other than size). Clorox’s most recognizable cleaning product can likely be found in everyone’s closet - Clorox bleach. Other cleaning products include Formula 409 and Pine-Sol, but the diversity of this company reaches from water-filtration systems to cat-litter products.

Major Cleaning Needed
When it comes to big clean-up jobs, you can count on Ecolab (NYSE:ECL), an institutional cleaning company that offers a variety of services to hospitals, hotels, restaurants and others. The company also makes most of the cleaning products they use and sells them to other companies in the cleaning industry. In July, Ecolab reported a 26% profit increase for its second quarter ending June 30 after reporting a record 55 cents earnings per share. For the year, Ecolab has lagged the sector but is beating the S&P 500 with an 8% loss.

When cleaning a restaurant, Ecolab employees may run into someone from Darling International (NYSE:DAR). The company is the largest independent rendering operation in the U.S. It collects animal byproducts and used cooking grease at more than 100,000 restaurants. Darling may not be your typical cleaning products company, but by cleaning out the waste from restaurants, it supplies the ingredients used in everything from soap to rubber.

In early August, Darling reported Q2 profits of 29 cents per share - more than double its 12 cents per share from a year earlier. Since that time, the stock has fallen about 20% to its September 10 close of $11.90. For the year, the stock remains in the green with a gain of more than 3%, easily beating the S&P 500, which has seen a 16% decline in 2008.

Surfactant Supplier
Stepan Company (NYSE:SCL), known as a cleaning products stock, supplies surfactants to cleaning product makers. Surfactants are chemicals used in many consumer cleaning products such as detergents, toothpastes and cosmetics. While this is the largest company division, Stepan also dabbles in other specialty chemicals used in foods, drugs and the oil recovery business. Of the handful of stocks in the cleaning products sector, Stepan has been the best performer this year with a 74% increase.

Stay Clean
When you're looking for new stocks for your portfolio and you prefer to stay away from market volatility, consider the cleaning products. Because they are considered consumer non-durables, the probability of them holding up well in a dirty, down market is high.

For more on these types of investments, read Cyclical Versus Non-Cyclical Stocks and Surviving Bear Country.

By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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